Apparently, the recent allegations of infringements of money-laundering regulations by Commonwealth Bank (CBA) first came to the board’s attention in “the second half of 2015”.
Since then the bank has taken a number of steps to fix the issues, including correcting a software error, upgrading account-monitoring technology, changing senior leadership roles in compliance monitoring and recruiting more than 50 financial crime compliance professionals. Short-term bonuses for senior management have been axed, while fees for non-executive directors have been cut by 20%.
All up, it appears that management is dealing with the issues effectively and that there are no systemic problems.
CBA’s 2017 net profit after tax of $9.9 billion represented a 4.6% increase on 2016, while cash earnings per share rose 3.5%, to $5.74, due to the increase in shares on issue as a result of the dividend reinvestment plan.
The good news began with loan growth of 5.6%, balanced pretty evenly between home loans and business loans.
The loan growth was moderated by a slight fall in the net interest margin – from 2.13% to 2.09% (excluding treasury and markets) – as a 0.5% benefit from raising interest rates was offset by an increase in funding costs.
The net effect was an underlying increase of 3.8% in operating income.
With underlying operating costs rising by around 3.4%, that meant the underlying pre-impairment profit rose by 4.9% to $14.9 billion. Impairments fell by 12.8% to $1.1 billion, representing just 0.15% of average loans outstanding, down from 0.19% in 2016.
The balance sheet saw an improvement in the proportion of deposit funding, which rose another percentage point to 67%, thanks to strong growth in transaction accounts.
The common equity tier 1 capital ratio, a measure of the bank’s strength, came to 10.1% in June, up from 9.9% in December. Selling the life insurance business, a 1.5% discount on the dividend reinvestment plan and organic capital generation should see it get up to the 10.5% required by the regulator APRA.
Management also expects the federal government’s new banking levy to cost around 2.6% of annual cash profit.
With more shares to be issued and the new banking levy, we’re unlikely to see much earnings per share growth in 2018. That puts the stock on a price-earnings ratio of 13.1, although this increases to 15.1 if we adjust for estimated through-the-cycle impairments of 0.4%. The $4.29 annual dividend (up 2%) is also unlikely to see much growth in the short term but it gives the stock a decent fully franked yield of 5.7%. Based on the value investing methodology, the shares aren’t cheap enough to buy. HOLD.